Baku, Azerbaijan, Dec. 5
By Dalga Khatinoglu, Umid Niayesh – Trend:
The OPEC decision to reduce its production by 1.2 million barrels a day, which is supported by Russia that agreed to reduce its output by 300 thousand barrels, is only a face-saving gesture, Kamran Dadkhah, an associate professor at the Department of Economics in the US-based Northeastern University, told Trend.
The OPEC decision will not have any significant effects on the price of oil in the medium term, Dadkhah said, adding that the immediate effect on the price of oil was psychological and based on expectations which would not materialize.
For several years the OPEC members have been unable to reach an agreement and a failure to reach a consensus after so much propaganda would have been the last nail in OPEC’s coffin, Dadkhah said.
"To see why such a decision has no effect on the price of oil, we should remember that Iran and a couple of other countries are not required to reduce their production," he added.
"There are two questions: 1. Why Saudi Arabia would reduce its output to help Iran earn money? 2. Which countries are supposed to reduce their output by a total of 700 million barrels a day?
In addition, we need to note that historically OPEC members did not consider themselves obligated to observe their quotas. They produced as much as they could sell," Dadkhah said, adding that moreover, OPEC is producing only a third of the world oil output and therefore, it really cannot control the price.
"I should also add that OPEC never had such power and the story that OPEC increased oil prices in the 1970’s is just a fiction."
He further touched upon two other factors on the issue, saying that "new technologies have allowed the United States to increase its oil output by fracking and using shale oil. Second, president elect Donald Trump has expressed support for oil pipelines and use of more traditional sources of energy."
"Putting all these factors together we can conclude that only a rise in the world economic growth could cause a substantial increase in the price of oil in the medium term. OPEC’s decision wouldn’t have much effect," he noted.
Regarding Iran’s energy sector, Dadkhah said that the Joint Comprehensive Plan of Action (JCPOA aka nuclear deal) has allowed Tehran to increase its oil output to near what it had prior to sanctions, adding that the country has an easier time in accessing oil revenues.
"But for many years Iran’s oil and energy sectors have suffered from a lack of investment. Moreover, Iran’s fields are using outdated technologies," he added. Capital and technology have to come from abroad," Dadkhah said.
"Iran has to settle its disputes with the United States and Europe and encourage international investment which would also bring modern technologies. A stable and perhaps higher price of oil would help this process."